Bank chief plays down stock fears

PUBLISHED : Tuesday, 13 March, 2007, 12:00am
UPDATED : Tuesday, 13 March, 2007, 12:00am

Recent volatility in the mainland's stock markets is not directly linked to any macroeconomic weakness and should not result in major falls, the central bank chief suggested.

People's Bank of China governor Zhou Xiaochuan yesterday said excessive liquidity would not necessarily affect the stock or property markets on a specific day, but the government should adopt prudent and adequately stringent policies on the oversupply.

'There have been many comments from the media, economists and market insiders on the recent stock market fluctuations. Personally, I believe this is not a problem on the macroeconomic level and should not lead to any big change,' Mr Zhou said on the sidelines of the National People's Congress.

The Shanghai Composite Index tumbled 8.84 per cent on February 27, recording its biggest single-day percentage decline in a decade. There has been heated debate on whether the sudden sell-off sparked a rout lasting several days in the rest of Asia, Europe and the US.

Asked whether the Shanghai market was responsible for triggering the falls in shares overseas, Mr Zhou said globalisation was making markets more interrelated.

'China used to believe ours was a relatively small, fledgling market under construction, or an emerging one developing in a period of economic transition,' he said. 'With globalisation, there has been a close interrelation between fluctuations on different stock markets.

'So we need to speed up the development of the Chinese market, increase the proportion of direct financing, and make our capital market work under conditions and rules close to its international counterparts.'

Mr Zhou said the oversupply of liquidity alone would not have caused the tumble because the market was complex and many factors contributed to fluctuations. But excessive liquidity was a global phenomenon worthy of close attention.

'All macroeconomic regulatory bodies should pay close attention to it, and adopt prudent and adequately stringent policies,' he said.

The central bank would continue to mop up liquidity by using instruments including open market offerings and adjustments to mandatory deposit reserve ratios, as well as the interest rate charged for interbank lending, Mr Zhou said.

The most effective means to adjust the balance of accounts, the source of the excessive liquidity, was to expand domestic consumption, develop the services sector, increase imports and encourage businesses to invest abroad, he said.

'It may take longer for these policies to show effects ... Foreign exchange rate policy could also play some role in leveraging prices.'

The central bank said yesterday the mainland would gradually increase the flexibility of the yuan and accelerate financial reforms. Mr Zhou has described yuan flexibility as 'desirable' and said Beijing may 'gradually' widen its trading band.

US lawmakers accuse China of keeping the yuan artificially weak to spur exports and have threatened to impose sanctions.

In a bid to boost domestic demand, the bank is continuing the reform of rural co-operatives and research on microcredit to farmers.

'Interest rate marketisation reforms for rural co-operatives and other rural financial institutions has almost been completed,' Mr Zhou said. 'The central bank has also allowed the co-operatives to hold lower reserve levels [than urban banks] to encourage them to extend loans to farmers.'

The listing of the Agricultural Bank of China this year would also improve rural services, he said.